Monthly Archives: May 2019

Rulemaking Petition on Non-GAAP Financials in Proxy Statements

Ken Bertsch is Executive Director and Jeff Mahoney is General Counsel of the Council of Institutional Investors (CII). This post is based on a petition that CII submitted to the Securities and Exchange Commission on April 29, 2019. CII Deputy Director Amy Borrus and Research Director Glenn Davis contributed to this post.

The Council of Institutional Investors (CII) on April 29, 2019, petitioned the U.S. Securities and Exchange Commission (SEC) to require clear disclosure on use of non-GAAP financial metrics in the proxy statement Compensation Discussion & Analysis (CD&A). CII asked that the SEC apply the same rules and guidance in that document as it does for earnings releases and other filings. Non-GAAP financials should be explained and placed in appropriate context, and a reconciliation to GAAP should be provided or hyperlinked if the identical adjusted GAAP figures are reconciled in another filing. [1]

The use of non-GAAP or “adjusted” earnings in earnings reports is widespread and on the rise. Research by The Analyst’s Accounting Observer found that 386 companies in the S&P 500 index reported “adjusted” earnings in 2016, up from 264 in 2009. In both years, “adjusted earnings” were on average about one third higher than reported GAAP earnings. Exclusions included costs of equity grants, asset impairments, intangible amortization and restructurings.

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The Never-Ending Quest for Shareholder Rights: Special Meetings and Written Consent

Emiliano M. Catan is Associate Professor of Law and Marcel Kahan is George T. Lowy Professor of Law at New York University School of Law. This post is based on their recent article, forthcoming in the Boston University Law Review. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power, by Lucian Bebchuk; and What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

Almost thirty years ago, Chancellor William Allen famously remarked that “a corporation is not a New England town meeting.” Perhaps so—but efforts are under way to change this. One of the most sought-after shareholder rights is the right of shareholders to take actions not just at annual meetings, the corporate equivalent of regularly scheduled political elections, but in between, at shareholder-convoked special meetings or by written consent, the corporate equivalent of town meetings. Shareholder proposals asking for the right to call a special meeting or to act by written consent, in turn, constitute one of the most common proposal types submitted over the last ten years and companies have increasingly heeded these shareholder requests. At special meetings or by written consent, shareholders unhappy with the present board may be able to elect directors more to their liking. After the near demise of staggered boards among large U.S. companies, the move to permit shareholders to act in between annual meetings may thus be the next logical step towards making the board replaceable by shareholders at will—or as critics may say, at the whim of a shareholder majority.

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Weekly Roundup: May 24-30, 2019


More from:

This roundup contains a collection of the posts published on the Forum during the week of May 24-30, 2019.


The Corporate Form for Social Good





Management Duty to Set the Right “Tone at the Top”


Compliance, Compensation and Corporate Wrongdoing



A Fresh Look at Exclusive Forum Provisions


Corporate Law and the Myth of Efficient Market Control


13F Analysis: Q1 2019


Sanctions Compliance Programs and Flags “Root Causes”





Proxy Advisor Influence


A Quarter Century of Exchange-Traded Fun!

A Quarter Century of Exchange-Traded Fun!

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at the ETFs Global Markets Roundtable, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Since the first exchange-traded fund (“ETF”) launched in 1993, ETFs have proven to be one of the most useful and successful innovations in the registered fund space under the Investment Company Act (“Act”) of 1940. The innovation did not stop with that first ETF. Besides being one of the fund industry’s most successful financial innovations, ETFs have been, and have the potential to continue being, the wrapper within which future financial innovations occur. Today, I want to share my thoughts on how ETFs can be used to facilitate further financial experimentation and innovations and how the SEC can fulfill its role of protecting investors, facilitating capital formation, and fostering fair, orderly, and efficient markets without unnecessarily slowing this innovation. Before I begin, I must give the standard disclaimer: The views I represent are my own and do not necessarily represent those of the Commission or my fellow Commissioners.

People who call me “CryptoMom” often ask me how long it will be before a bitcoin-based exchange-traded product (“ETP”) is approved by the SEC. My typical answer is: I do not know, particularly because the initial decisions are made at the staff level, but it may be a long time. To provide some context, it is helpful to think about how the SEC has dealt with ETFs—one category of ETP—in their twenty-five year history. As I mentioned, ETFs have been around since 1993 after getting the green light from the Commission in 1992. [1] 1993 was a momentous one for me because it was in that year that my oldest niece was born. Just the other day, I found a picture of her at less than one year old sitting on the living room floor with a happy, toothless smile. She now has teeth, her master’s degree, and a successful career. In short, regardless of her aunt’s nostalgia for that pudgy, smiley baby, she is all grown up.

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Proxy Advisor Influence

Andrew F. Tuch is Professor of Law at Washington University School of Law. This post is based on his recent article, forthcoming in the Boston University Law Review.

Commentators point to a fairly standard set of factors to explain why proxy advisors exert the influence they do over institutional investors and corporate managers. They say that proxy advisors can mitigate institutional investors’ collective action problems, that legal rules and high levels of institutional investor ownership have created demand for proxy advisors’ services, and that the increased economic significance of investors’ voting decisions has magnified their incentives to use proxy advisors. But there’s a puzzle that casts doubt on the completeness of these explanations. If we compare the United States with a system exhibiting similar laws, institutions, market actors (including proxy advisors), and other relevant characteristics—the United Kingdom—we observe the presence of the oft-cited explanatory factors in both. To be sure, there are differences between the systems as the comparison becomes more granular. But, at the level of abstraction at which the factors are often described, they exist in the United Kingdom as well, suggesting that institutional investors have broadly similar incentives to engage and rely on proxy advisors, giving proxy advisors somewhat similar influence. Yet, to the best of our knowledge, proxy advisors enjoy significantly stronger influence over institutional investors and corporate managers in the United States.

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SEC Roundtable on Short-Termism and Periodic Reporting System

David A. Katz and Victor Goldfield are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here) and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).

In a welcome development, SEC Chairman Jay Clayton has announced that the SEC Staff will hold a roundtable this summer to discuss the impact of short-termism on the management of public companies and the interplay with the SEC’s periodic reporting system and regulatory requirements. The roundtable “will seek to explore the causes of short-termism and to facilitate conversations on what market-based initiatives and regulatory changes could foster a longer-term performance perspective in American companies.”

Noting that Main Street investors are largely responsible for funding their own retirement and other financial needs, together with the increase in life expectancies, there should be an even greater focus on long-term results, while maintaining liquidity as needed:

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Corporate Purpose: Stakeholders and Long-Term Growth

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. RosenblumKaressa L. Cain, and Sabastian V. Niles.

Until recently, the dialogue on corporate governance has focused almost exclusively on how to increase the ability of shareholders to impose their will on corporations. Shareholder groups, advisory firms and academics continually developed and added to a set of “best practices” for corporations and their boards of directors, designed to facilitate the ability of shareholders to communicate to corporations what the shareholders wanted and to enforce those dictates if the corporation did not respond. The underlying assumption of this movement was the concept of shareholder primacy. Even the Business Roundtable, in 1997, inexplicably changed from a prior statement of corporate purpose that gave consideration to all stakeholders, to a statement endorsing shareholder primacy: “The Business Roundtable wishes to emphasize that the principal objective of a business enterprise is to generate economic returns to its owners.” Policies such as majority voting, proxy access, elimination of classified boards and rights plans, annual say-on-pay votes, the ability of shareholders to call special meetings and act by majority written consent, and other means for the exercise of shareholder power, were periodically promulgated and largely adopted. Short-termism and attacks by activist hedge funds increased exponentially.

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Crypto Assets and Insider Trading Law’s Domain

Andrew Verstein is Associate Professor at Wake Forest University School of Law. This post is based on his recent article, forthcoming in the Iowa Law Review. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

An extensive literature addresses the substance of insider trading law. For example, should new techniques of high frequency trading be penalized as a species of “insider trading 2.0?” Should all insider trading be decriminalized? Far less attention has been devoted to the domain of insider trading law. Insider trading law applies to stock, but does it cover bonds? How about commercial real estate, coveted artworks, or copper? Should it? The question of domain is distinct from the questions of whether we ought to have insider trading law at all or what precise form that law ought to take.

In a forthcoming article, I provide a limiting principle, which demarks the outer boundary of insider trading law. In building up the case for this principal, I carefully attend to an asset class that is commonly thought to lie beyond the domain of insider trading law and policy, and which are important in their own right: crypto assets, such as Bitcoin.

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Sanctions Compliance Programs and Flags “Root Causes”

Brad Karp is chairman, Roberto Gonzalez is partner, and Rachel Fiorill is counsel at Paul, Weiss, Rifkind, Wharton, Garrison LLP. This post is based on a Paul, Weiss memorandum authored by Mr. Karp, Mr. Gonzalez, Ms. Fiorill, Christopher Boehning, Jessica Carey and Michael Gertzman.

On May 2, 2019, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued guidance entitled “A Framework for OFAC Compliance Commitments” (the “Framework”), that strongly encourages companies to “develop, implement, and routinely update” a risk-based sanctions compliance programs (“SCPs”). OFAC made clear that the guidance was intended for U.S. companies as well as non-U.S. companies that conduct business in or with the United States, with U.S. persons, or using U.S. origin goods or services. The guidance describes five “essential components” of an effective sanctions compliance program: (i) management commitment, (ii) risk assessment, (iii) internal controls, (iv) testing and audit, and (v) training.

In December of last year, Under Secretary of the Treasury for Terrorism and Financial Intelligence Sigal Mandelker previewed that OFAC would be issuing this guidance on the “hallmarks of an effective compliance program,” marking a new effort by Treasury to more clearly and comprehensively communicate its compliance expectations. OFAC Director Andrea Gacki explained that it was developed as part of OFAC’s continuing effort to strengthen sanctions compliance practices “across the board,” and “underlines [OFAC’s] commitment to engage with the private sector to further promote understanding of, and compliance with, sanctions requirements.” Consistent with OFAC’s Enforcement Guidelines, the Framework emphasizes that in the event of an OFAC enforcement action, the agency will consider favorably that a company had an effective SCP at the time of the apparent violation; it will also consider the Framework in evaluating a company’s remedial actions. The Framework also states that, in appropriate cases, it will consider the effectiveness of a company’s SCP at the time of the apparent violations in determining whether the apparent violations were “egregious” under OFAC’s Enforcement Guidelines.

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13F Analysis: Q1 2019

Jim Rossman is Head of Shareholder Advisory at Lazard. This post is based on his Lazard memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here);  Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

  • Rule 13F-1 of the Securities Exchange Act of 1934 requires institutional investors with discretionary authority over more than $100m of public equity securities to make quarterly filings on Schedule 13F
    • Schedule 13F filings disclose an investor’s holdings as of the end of the quarter, but generally do not disclose short positions or holdings of certain debt, derivative and foreign listed securities
    • Filing deadline is 45 days after the end of each quarter; filings for the quarter ended March 31, 2019 were due on May 15, 2019
  • Lazard’s Shareholder Advisory Group has identified 16 core activists, 31 additional activists and 24 other notable investors (listed on the following page) and analyzed the holdings they disclosed in their most recent 13F filings and subsequent 13D and 13G filings, other regulatory filings and press reports
    • For all 71 investors, the focus of Lazard’s analysis was on holdings in companies with market capitalizations in excess of $500 million

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